Opinion
No. 515145.
1946-08-9
HOLMS v. REPUBLIC STEEL CORPORATION et al.
J. W. Wursthorn and David Perris, both of Cleveland, for plaintiff. Thomas F. Patton, of Cleveland, for defendant Republic Steel Corporation.
Derivative action by Hannah S. Holmes, owner of 12 shares of common capital stock of Republic Steel Corporation, against the Republic Steel Corporation and Tom M. Girdler, chairman of the corporation's board of directors, attacking the legality of the salary paid by the corporation to Tom M. Girdler, a payment of $51,000 made in 1940 to him in addition to his salary, and a pension contract for the benefit of Tom M. Girdler. The plaintiff died while the action was pending and it was revived in the name of Godfrey Holmes, her administrator.
Judgment for plaintiff only with respect to the payment of $51,000.J. W. Wursthorn and David Perris, both of Cleveland, for plaintiff. Thomas F. Patton, of Cleveland, for defendant Republic Steel Corporation.
Jones-Day-Cockley & Reavis, of Cleveland, for defendant T. M. Girdler.
ORR, Judge.
This is a derivative action originally brought by Hannah S. Holmes, who was the owner of twelve shares of the common capital stock of the Republic Steel Corporation, against that corporation and Tom M. Girdler, Chairman of its Board of Directors. While the suit was pending Mrs. Holmes died, and the action was revived in the name of Godfrey Holmes, her Administrator. The right to such revivor has been determined by the Court of Appeals, 64 N.E.2d 426. We shall, for convenience, hereafter refer to the individual defendant, Tom M. Girdler, as the defendant, and the corporate defendant, the Republic Steel Corporation, as Republic.
The plaintiff attacks the legality of (1) the salary paid by Republic to the defendant; (2) a payment of $51,000 made in 1940 to the defendant in addition to his salary of $175,000; and (3) a pension contract for the benefit of the defendant entered into with Republic in 1937.
Republic, a New Jersey corporation, is said to the third largest steel company in the world, having in excess of 5,000,000 shares of stock owned by more than 60,000 shareholders. Its annual report shows that in the year 1940 the average number of employees was approximately 56,000. The reports received in evidence further describe vast holdings of the corporation in steel plants, manufacturing divisions, coal and ore mines, and subsidiary companies.
The defendant came to Republic in 1930 as Chairman of the Board of Directors and has since continued in that capacity. For several years he was not only the Chairman of the Board but also the President. He has, at all times, been a director of the corporation and its active chief executive officer and has devoted his full time to the performance of his duties.
Defendant's salary was fixed at $137,500 for the first year of his employment. The lowest amount paid him during the period reviewed by this action, 1930 to 1940, was $117,187 in the year 1932, and the highest amount paid was in 1940 when he was paid the sum of $176,000 and given an annuity contract having a value of $50,000. We shall later discuss in more detail this annuity contract.
In 1937 a contract was entered into between the defendant and Republic which provided that a certain pension be paid to the defendant upon his retirement at the age of 65, or thereafter, from active service of Republic. We shall also hereafter explain at greater length this contract and the pension plan of which it is a part. These in briefest outline are the facts. We shall discuss separately the three major questions presented for our consideration and shall then recite further facts applicable to each question.
The Fixed Salary.
The petition alleges that Republic has paid to the defendant salaries which were excessive, unreasonable and unconscionable and that such action was an unwarranted, wasteful and reckless dissipation of Republic's assets. The plaintiff asks that the Court make a finding to this effect, determine the amount so found to be excessive and unlawful, and render judgment against the defendant in the amount so determined. This question was decided during the trial, at the conclusion of the plaintiff's case, the Court then orally stating his views. In order, however, that the record may be complete and all issues in the case may be completely disposed of in this opinion, we deem it advisable, even at the risk of making this opinion too verbose, to incorporate herein parts of our statement made at that time. We said orally:
‘We can start with the statement of the well established rule that courts are withoutpower to interfere with the activities of stockholders or directors in the fixing of compensation of officers unless there is injustice or circumstances amounting to fraud or a clear abuse of their powers. In order to determine whether the plaintiff's case meet this test, we, of course, must look to the evidence.
* * *
‘This evidence discloses that when the corporation was formed by a merger of several companies in 1930, Mr. Girdler came to the corporation at a salary which he said he named and received. Thereafter, according to his testimony, his compensation was fixed regularly by the board of directors. He testified that he never voted on any resolution which fixed his compensation. The minutes of the meeting bear out this testimony. The minutes show that at the time Mr. Girdler presided, and I think he presided at practically all of these meetings, he retired from the chair and he testified that he usually retired from the room. Apparently his presence was not necessary in order to constitute a quorum at any of these meetings.
‘The annual reports of the corporation show that he was the chief executive officer of what is said to be the third largest steel corporation in the country, if not in the world, and these reports indicate further that in the early years of his employment, the corporation suffered losses; that in the latter years of the period which we are examining, the corporation made a profit until in the year 1940, it made a profit of approximately $21,000,000. How much of this can be attributed to the efforts of Mr. Girdler and how much to other causes, no one can say. The corporation was created on the eve of a great depression. It went through that and later it found itself in a period of uncertainty caused by a number of things, including the impending war; but in the meanwhile, the company's earnings had increased, its financial structure had been strengthened and large properties had been acquired by merger of other companies and by construction.
‘Throughout this entire time, the stockholders were content to continue the defendant Girdler as a chief executive officer and he still continues as such.
‘The plaintiff alleges that during this period of time the directors were under the control and domination of the defendant Girdler and of the other directors who were receiving large salaries. There is not a word of testimony in support of that statement. The record, on the contrary, shows that the requirements and regulations of the corporation were scrupulously complied with. There has been no question raised as to the accuracy of these records.
‘The plaintiff, however, says that for a considerable period of time the defendant Girdler was a member of the proxy committee which voted for the directors at the annual stockholders' meeting and these directors, in turn, fixed the compensation of Mr. Girdler and his other associates and thereby plaintiff says he controlled and dominated the actions of the directors.
‘We are not influenced by this rather tenuous argument. It is true that in certain reported cases it has been shown that the power of a proxy has been so abused or so used as to constitute an unlawful domination or control, but there is nothing in the evidence of this case which indicates that.
* * *
‘The plaintiff has offered no evidence of bad faith or self dealing. We often find that in the reported cases, but there is no evidence that the directors acted dishonestly or unfairly in fixing the compensation.
‘It is a well established rule of equity that courts are reluctant to interfere with the discretion of corporate directors, and, as it was said in the case of Seitz v. Union Brass & Metal Mfg. Company, 152 Minn. 460, 189 N.W. 586, 27 A.L.R. 293, ‘in determining whether salaries are excessive and unreasonable so that there shall be restoration, courts proceed with caution. An intolerable condition might result if a court should too lightly undertake the fixing of salaries at the suit of the dissatisfied stockholders. An issue as to the reasonable value of the services of officers is easily made. It is not intended that the court should be called upon to make a yearly audit or adjust salaries. The dissenting stockholders should come into court with proof of wrongdoing or oppression and should have more than a claim based on mere difference of opinion upon the question whether equal services could have been performed for somewhat less. Were it otherwise efficient executives able to command in competition large salaries risk their capital on the faith of control and on steady employment, would find themselves and their capital imperiled by the uncertain view which a court might take.’
* * *
‘The plaintiff has adduced no evidence which would warrant the Court in substituting his judgment for the judgment of the men whom the stockholders have chosen by lawful means to direct the affairs of the corporation, including the fixing of salaries of the officers.’
Additional Compensation Paid in 1940.
The second question deals with the so-called annuity contract of 1940. The statute of the state of New Jersey provides that officers, such as the Chairman of the Board, shall be chosen in such manner and for such terms as the by-laws may direct. General Corporation Act, Title 14:7–6, N.J.S.A.
The pertinent part of By-law No. 12 of Republic is as follows:
‘The officers of the Company shall be, a Chairman of the Board of Directors, a President, (the foregoing to be chosen from the Directors) one or more Vice-presidents, * * *. The term of office of every officer shall be from the date upon which he shall be chosen, until the first meeting of the Directors after the next annual meeting of the stockholders, and until his successor in office shall be chosen, * * * the compensation of all officers shall be fixed by the Board of Directors or Executive Committee.’ (Defendants' Ex. 18)
On April 10, 1940, the Board of Directors met with the defendant presiding as Chairman. Fourteen directors, the comptroller and general counsel were present. We quote the following from the minutes of that meeting:
‘The Chairman submitted a list of the officers of the corporation with their present salaries. Mr. T. M. Girdler retired from the chair and Mr. R. J. Wysor presided. Upon motion fully made, seconded and carried, Mr. Girdler not voting, the salary of Mr. T. M. Girdler, as Chairman, was fixed at the rate of $175,000.00 per year, plus such additional amount, if any, as the Board of Directors may determine prior to December 31, 1940.’ (Plaintiff's Exhibit 5)
Similar resolutions were adopted, each for different amounts, as to the salary of the president, the vice-president in charge of sales, and the vice-president in charge of operations. Each director affected refrained from voting on the resolution with reference to his salary, but not as to the other salary resolutions. The extract of the Minutes of the meeting received in evidence (Plaintiff's Exhibit 5) does not disclose the fact but it may be assumed from the later action of the board that the salary of one other director, Mr. Wick, was considered in a similar resolution. Apparently a quorum was present without the interested directors.
On December 23, 1940, the board of directors again met and the minutes of the meeting read, in part, as follows:
‘The Chairman stated that he desired to present to the meeting the desirability of having the corporation purchase deferred annuity contracts, having no cash surrender value, on the lives of the five chief executive officers of the corporation in an aggregate amount not exceeding $149,500.00 and the delivery of such contracts to the said officers as additional compensation for the calendar year 1940.
‘Thereupon, after full discussion, the following resolution was duly offered and seconded and being put to vote was unanimously adopted:
‘Resolved that Republic Steel Corporation purchase deferred annuity contracts, having no cash surrender value, on the lives of the following named officers of the corporation in the respective amounts set opposite the name of each officer, to-wit:
‘Tom M. Girdler $50,000.00
* * *
‘Resolved further that R. J. Wysor, president and W. W. Hancock, secretary of the corporation be, and they hereby are, authorized and directed in the name and on behalf of the corporation to execute and deliver to an insurance company or companies applications for said annuity contracts.
‘Resolved further that W. W. Hancock, treasurer of the corporation, be, and he hereby is, authorized and directed to pay out of the funds of the corporation all premiums or other amounts required to be paid to purchase said annuity contracts.
‘Resolved further that when said annuity contracts shall have been issued and delivered to the Corporation, the Treasurer be, and he hereby is, authorized and directed to deliver to each of the above officers the annuity contract or contracts issued on the life of such officer, as additional compensation for services rendered to the Corporation by said officer during the calendar year 1940.
‘Resolved further that the Treasurer of the Corporation be, and he hereby is authorized and directed to pay to Tom M. Girdler as further additional compensation for services rendered by him to the Corporation during the calendar year 1940 the sum of $1,000 in cash.’ (Plaintiff's Exhibit 6)
During the course of the trial the general counsel of Republic explained the nature of the annuity contract and how it was entered into and terminated as follows:
‘In 1940, the directors, in accordance with the reservation they made at the time they fixed the salary for the year, voted additional compensation because of the excellent showing of the company for that year; but instead of paying it in cash, they delivered an annuity contract for which the company expended $50,000. That was done mainly on my advice to the directors in the hope that there would be no immediate income tax payable on that, but the income tax would be deferred until the annuity was received later under certain existing rules. I thought that could be done. However, when the returns were examined, the Federal Revenue inspectors assessed the deficiency claiming that it was additional compensation taxable immediately.
‘We went to the Board of Tax Appeals and the Board upheld the Commission. As a result, these men were called upon to expend considerable money in paying the deficiency taxes, so they surrendered the annuity to get the money to pay the cash, so it would up as though they got the money and paid the tax in the first instance.’ (Record, pages 18 and 19)
We may, therefore, consider that the sum of $51,000 was paid to the defendant in the year 1940 in addition to the sum of $175,000 as compensation for his services. When the defendant was interrogated under cross examination as to his understanding with reference to the additional compensation, his testimony was as follows:
‘Q. I will ask it this way: Was it discussed on April 10, 1940, that the salary was to be more than $175,000.00 and the additional was purposely left off the books, the minutes? A. There wasn't any understanding that there was going to be anything more at that time.
‘Q. There was not? A. No, absolutely.
‘Q. Your employment for the year was fixed and final except that if the board chose to give you something more, that was all right with you? A. Sure.
‘Q. You had no agreement to get more? A. I had no agreement of any kind whatever about any additional compensation.’ (Record, page 114)
The general counsel also testified, in cross examination, with reference to this subject, as follows:
‘Q. And there was also put in the words ‘if any’? A. That is right.
‘Q. What was the reason ‘if any’ was put in? A. I put that in because I assumed from the conversations of the directors that if the company lost money, there would not be any additional compensation voted, and if they made money, there would be.
‘Q. In other words, the ‘if any’ was to give the Board a choice of doing what they pleased? A. The whole resolution was.
‘Q. I understand, a pure choice. They didn't have to give anything if they didn't want to. That was your purpose in putting it in that form? A. It was just exactly as I said.’ (Record, pages 178 and 179)
It is the plaintiff's contention that under the evidence the directors were guilty of unauthorized, illegal and ultra vires acts, and that the additional compensation so paid is excessive and should be returned to the treasury of the corporation. On the other hand the defendant says his salary was fixed at $175,000 plus such sum as the directors might allow in addition; that he had a right therefore to expect more by way of compensation than $175,000 and that by the language of the resolution he is entitled to the additional compensation which he received.
We have carefully examined the cases which learned counsel have cited in argument and in their briefs. It is impossible to discuss all of these cases without making this opinion too long. Many of the cases are helpful, some art not. Certain of them deal with executives who are not directors; some involve facts and situations entirely different from the case at bar. From our study we have reached the conclusion that courts of equity in solving problems such as are presented by the case at bar, have been inclined to consider each case separately and on its own merits, applying to it certain well defined equitable principles.
When embarking upon an exploration of a question involving executive compensation the courts are likely to chart their course by certain well defined legal land marks. The first of these is that because of the fiduciary relationship of directors courts will closely scrutinize and strictly construe contracts for compensation between a corporation and a director.
It is because of the peculiar relationship which a director bears to the corporation and the shareholders, that the courts have held, and it may be said to be the general rule, that directors presumptively serve without compensation and that they are entitled to no salary or other compensation for the performance of the usual and ordinary duties pertaining to the office of director in the absence of some express provision or agreement to that effect. It is also will established that the law does not imply a promise to pay directors for services rendered by them as such. Therefore, in order for a director to receive compensation for services rendered the corporation, there must have been some provision made therefor in advance of his rendering the services. It is equally clear, however, that a director may recover where he renders services which are plainly outside of the duties of his office as director, and performed in another and distinct capacity. Such services are treated by the courts as extraordinary services and when they are rendered under such circumstances as raise an implied promise to pay for them the corporation is liable.
The court in a case which has been much quoted, National Loan & Investment Co. v. Rockland Co., 8 Cir., 94 F. 335, 337, makes this excellent summary of the law on this subject:
‘The directors of a corporation are trustees for its stockholders. They represent and act for the owners of its stock. Ordinarily the employment of a servant by a corporation raises the implication of a contract to pay fair wages or a reasonable salary for the service rendered, because it is the custom to pay such compensation, and men rarely sacrifice their time and expend their labor or their money in the service of others without reward. Directors of corporations, however, usually serve without wages or salary. They are generally financially interested in the success of the corporation they represent, and their service as directors secures its reward in the benefit which it confers upon the stock which they own. In other words, the custom is to pay the ordinary employés of corporations for the services they render, but it is the custom of directors of corporations to serve gratuitously, without compensation or the expectation of it. The presumption of law follows the custom. From the employment of an ordinary servant, the law implies a contract to pay him. From the service of a director, the implication is that he serves gratuitously. The latter presumption prevails, in the absence of an understanding or an agreement to the contrary, when directors are discharging the duties of other offices of the corporation to which they are chosen by the directory, such as those of president, secretary, and treasurer. Moreover, as the members of boards of directors act in a fiduciary capacity, they are without the power or authority to dispose of the property of the corporation without consideration. Consequently they may not lawfully vote back pay to an officer who has been serving the corporation voluntarily without any agreement that he shall receive any reward for the discharge of his duties. It is beyond their powers to create a debt of the corporation by their mere vote or resolution. Some authorities have gone so far as to hold that officers of a corporation, who are also its directors, cannot recover for the discharge of their duties unless their compensation is fixed by a by-law or by a resolution of the board before their services are rendered. Gridley v. [Lafayette B. & M.] Railway Co. 71 Ill. 200, 203;Kilpatrick v. [The Penrose Ferry] Bridge Co. 49 Pa. 118, 121, ;Wood v. [Lost Lake & C.] Manufacturing Co. 23 Or. [20] 23, 25, 23 P. 848 . The fact is, however, that in the active and actual business transactions of the world, many officers of corporations, who are also members of their boards of directors, spend their time and their energies for years in the interest of their corporations, and greatly benefit the owners of their stock, under agreements that they shall have just, but indefinite, compensation for their services. We are unwilling to hold that such officers should be deprived of all compensation because the amounts of their salaries were not definitely fixed before they entered upon the discharge of their duties. A thoughtful and deliberate consideration of this entire question, and an extended consideration of the authorities upon it, had led to the conclusion that this is the true rule: Officers of a corporation, who are also directors, and who, without any agreement, express or implied, with the corporation or its owners, or their representative, have voluntarily rendered their services, can recover no back pay or compensation therefor; and it is beyond the powers of the board of directors, after such services are rendered, to pay for them out of the funds of the corporation, or to create a debt of the corporation on account of them. Jones v. Morrison, 31 Minn. 140, 147, 16 N.W. 854;Blue v. [Capital Nat.] Bank, 145 Ind. 518, 522, 43 N.E. 655;Doe v. [Northwestern Coal &] Transportation Co., 9 Cir., 78 F. 62, 67; [Accommodation Loan & Savings Fund] Association v. Stonemetz, 29 Pa. 534; [New York & New Haven] Railroad Co. v. Ketchum, 27 Conn. 170; [Maux Ferry Gravel] Road Co. v. Branegan, 40 Ind. 361, 364. But such officers, who have rendered their services under an agreement, either express or implied, with the corporation, its owners or representatives, that they shall receive reasonable, but indefinite, compensation therefor, may recover as much as their services are worth; and it is not beyond the powers of the board of directors to fix and pay reasonable salaries to them after they have discharged the duties of their offices. Missouri River Co. v. Richards, 8 Kan. [101, 109, Reprint] 76, 81; Rogers v. [Hastings & Dakota] Railway Co., 22 Minn. 25, 27; [St. Louis, F. S. & W.] Railroad Co. v. Tiernan [37 Kan. 606,] 15 P. 544, 553;Stewart v. [St. Louis, Ft. S. & W.] Railroad Co., [8 Cir.,] 41 F. 736, 739;Rosborough v. [Shasta River] Canal Co., 22 Cal. [556], 557, 562.’
In the light of the above statement let us consider the resolution of the Board of Directors. Certainly there is no express agreement contained therein to pay the sum of $51,000. Can it then be said that the defendant was entitled to receive that sum by virtue of an implied promise? Here the testimony gives a negative answer. There was no expectation on the part of the defendant of payment of any sum in excess of $175,000. The law never implies a promise to pay for gratuitous services. The defendant cites and places considerable reliance upon the case of Church v. Harnit, 6 Cir., 35 F.2d 499, 501. This is a leading case and parts of the opinion standing alone might seem to support the defendant's contention. We therefore deem it advisable to repeat at length part of the opinion:
‘The case is thus baldly said to involve the power of a board of directors of an Ohio corporation without express authority of the by-laws or the authorization of the stockholders, to vote a bonus allowance to the president and general manager for past services, rendered under contract for a fixed salary, and the power of the president to make similar bonus allowances to three of the directors, also officers and employees of the company upon fixed salaries, who, with the president, were four of the five directors of the company. If this were a full and complete statement of the situation here involved, there would seem to be little question that the issues must then be decided in favor of the plaintiff-appellant. Wheeler v. Abilene Nat. Bank Bldg. Co., [8 Cir.,] 159 F. 391, 394, 16 L.R.A.,N.S., 892, 14 Ann.Cas. 917;Schall v. Althaus, 208 App.Div. 103, 203 N.Y.S. 36;McNulta v. Corn Belt Bank, 164 Ill. 427, 45 N.E. 954,56 Am.St.Rep. 203. Both the directors and officers of a corporation occupy a highly fiduciary position in relation to all stockholders, Wardell v. R. Co., 103 U.S. 651, 26 L.Ed. 509. Cf. United States v. Dunn, 268 U.S. 121, 45 S.Ct. 451, 69 L.Ed. 876;Goodin v. [Cincinnati & W.] Canal Co., 18 Ohio St. 169,98 Am.Dec. 95;Bosworth v. Allen, 168 N.Y. 157, 61 N.E. 163, 55 L.R.A. 751, 85 Am.St.Rep. 667. The corporate property, including surplus and profits, belongs to the stockholders. Active stockholders in the capacity of directors cannot, without authority and during the existence of contracts for fixed compensation, give to themselves a larger proportion of the earnings than is accorded to inactive stockholders. Carr v. Kimball, 153 App.Div. 825, 139 N.Y.S. 253, 259, affirmed 215 N.Y. 634, 109 N.E. 1068. They cannot so limit the dividends to the inactive group to what the officers and active stockholders personally consider a reasonable return upon the investment. Godley v. Crandall & Godley Co., 212 N.Y. 121, 105 N.E. 818, L.R.A.1915D, 632. But the above statement entirely omits from consideration that which we consider as peculiarly vital in the present case.
‘ From the very inception of defendants' association with the company it was understood by each of them, as well as by the boards of directors from time to time, that the fixed salary should be considered as the minimum compensation for services rendered, and that each of the defendants should be entitled to receive additional allowances, more fully compensating them for their services, in the event that the affairs of the corporation prospered. Bonuses of varying amounts were paid to one or more of the defendants each year from 1901, increased in amount with the increasing success of the business, and may be said to have no more than brought the total compensation paid, salaries and bonus, to a close approximation of what was paid elsewhere for similar services in the same line of business. There is no contention on the part of the plaintiff-appellant that the defendants received more in the way of salary and bonus than the fair value of their services. The business was managed with marked efficiency. Each of the defendants applied himself with peculiar energy and ability to his particular task. Each served through the succeeding years with the understanding and expectation that he would receive additional compensation if his loyalty and industry merited, and the success of the business warranted, such allowances. The company would now be estopped to deny that such was the contract of employment. Letta v. Cincinnati Iron & Steel Co., 6 Cir., 285 F. 707. Otherwise expressed, the agreement of employment was not for a fixed salary but for a minimum salary, with the maximum to be determined upon principles of quantum meruit and consistent with the success of the business.
‘Under the foregoing circumstances, we are of the opinion that the corporation, in whose interest and on whose behalf the plaintiff files his bill, must be held to have contracted with the defendants for the payment of reasonable additional compensation of bonus. There is nothing illegal or against public policy in such a contract. Cf. National Loan & Investment Co. v. Rockland Co. [8 Cir.], 94 F. 335;Metropolitan Rubber Co. v. Place, [2 Cir.], 147 F. 90;Tietsort v. Irwin, [6 Cir.], 9 F.2d 65;Rowland v. Demming Exploration Co., Trustees, 45 Idaho 99, 260 P. 1032;Girard v. Case Bros. Cutlery Co., 225 Pa. 327, 74 A. 201;Putnam v. Juvenile Shoe Corp., 307 Mo. 74, 269 S.W. 593, 40 A.L.R. 1412.
‘The one essential requirement in such cases is that the services shall not only be valuable, but that they shall have been rendered with the understanding and intentionthat they were to be paid for or under such circumstances as would raise a fair presumption of such intention.’ (Emphasis ours).
It will be observed that the unusual circumstances and customs under which the officials served takes this action out of the rule announced in the beginning of the opinion. There a practice of paying bonuses had been followed by that company for 23 years. The court also points out that the custom was so firmly fixed in the corporate procedure as to estop the company to deny that there was a contract of employment and the court also states that there must not only be valuable services rendered but that they must have been performed with the intention that pay would be received for them. In the case at bar, there was no such custom. It was only done once by the directors. There is no question of estoppel and certainly the testimony does not indicate that the beneficiary reasonably expected to be paid more than $175,000 for his year's services. It should also be noted that in the Church case there apparently was no duty on the part of the directors to fix the compensation and the court found that in fact compensation was not fixed.
We therefore find this case not to be controlling but rather illustrative of the statement previously made herein, that these cases turn upon the facts in each case.
Under the statute of the state of New Jersey and pursuant to the by-laws of Republic, the directors were under the requirement and duty to fix compensation of the defendant. To ‘fix’ as used in the bylaws means to determine or to make definite. We do not believe that it was necessary that the directors specify in the resolution the exact amount the officer was to be paid, but if they did not, then certainly they were required to establish a formula by which it could be computed without mistake or misunderstanding. For instance, it is perfectly proper to provide that as part of his compensation, an officer may receive a certain percentage of the profits of the business, or a bonus based upon certain production or sales records. Such methods should, however, be clearly stated in advance of the rendering of the services and should not be left to speculation or uncertainty. It is likewise true, that the courts have held in many cases that the circumstances may be such as to create an implied contract for compensation, even though there may have been no express contract, or there may have been an invalid contract. What do the facts indicate with reference to defendant's compensation?
When the directors came to fix the defendant's compensation, instead of naming a definite amount they passed a resolution allowing the sum of $175,000, plus such additional sum as they might determine before the end of the year. They announced no rule or formula by which the additional compensation was to be determined. Apparently they were uncertain and decided to await the end of the year when they could ascertain what profits the corporation had made. They did not promise to pay more than $175,000. The whole matter of increased remuneration depended not upon the efforts of the defendant but upon the profits of the business. The defendant testified positively that he did not expect more than $175,000 but he would take more if it were given him. The case can readily be distinguished from the cases cited by the defendant where the executive relied upon past experience or custom or belief that he would receive more compensation.
The defendant throughout has referred to the $51,000 as ‘deferred compensation.’ We consider this a misnomer. By the use of this expression the impression might be created that the compensation had been fixed but its payment postponed or deferred. Such is not the fact. The action of the Board as to the $51,000 was deferred, not the compensation itself. This case has no resemblance to those cases where the amount of compensation is determined but its payment or part thereof delayed until a later time. This payment was precisely what the resolution thrice denominates it, ‘additional compensation’ and not ‘deferred compensation.’
Under the circumstances of the case at bar there was no implied contract for more than the fixed amount. The defendant was satisfied that the reasonable value of his services had been determined at $175,000 and he made it perfectly clear in his testimony that he would not work if he was not satisfied with his compensation.
There is another reason why the Court cannot approve this transaction. Although we find no bad faith or actual fraud on the part of the directors, it is conceivable that the application of this same method of payment of an executive's compensation might be disastrous to the interests of the stockholders. Directors should not wait until the end of the year before determining what shall be taken from the profits for officers' salaries and then pass on the the stockholders what remains. If such conduct were approved directors might soon forget that companies are operated primarily to make money for the stockholders and not for management and that the emoluments of management must always be in keeping with the return to the investor. We do not here criticize the reason which prompted the purchase of the annuity contract in the hope that thereby a tax advantage could be gained, but it does possibly indicate other considerations than the payment to the defendant of the reasonable value of his services.
We do not believe that the clause in the resolution of April 10, 1940, which attempted to give the directors the right to add further compensation meets this requirement of the by-law to fix the compensation. It falls, we believe, within the rule which prevents the payment for services already performed. Had the resolution attempted to provide a revision of the salary, in consideration of further services, or for any other valuable consideration, an entirely different question would have been presented. It appears to us, therefore, that there was, insofar as the additional $51,000 is concerned, no additional consideration and the payment therefore has the characteristics of a gratuity.
We are not unmindful of those cases which hold that unless the amount of the payment is unreasonable or excessive that the Court will not interfere with the discretion of the directors in making the payment. While we do not determine that the amount which the defendant received was unreasonable, or do we question the good faith of the directors, we consider the circumstances under which the additional compensation was paid to be so clearly ultra vires that it cannot be approved.
Therefore, because the directors failed to fix the compensation as required by law, because there was no express contract for more than $175,000, because the defendant entered upon his employment without expectation of more than that sum, because there was no implied contract for the $51,000 payment, and because the additional amount was determined after the services had been rendered, we are of the opinion that this conduct is so irregular as to warrant a court of equity, in finding and we do therefore find, that the sum of $51,000 paid as additional compensation was paid without authority and that the payment made to the defendant in the year 1940 is excessive in that amount and should be recovered for the benefit of the corporation.
The Pension Plan.
We now turn to a consideration of the pension plan of Republic, with special regard to the contract with the defendant. At a meeting of the Board of Directors held in November, 1936, the Board gave consideration to the advisability of establishing a retirement plan for the principal employees of the corporation, and appointed a committee to study the subject. The committee reported to the Board of Directors at the meeting of January 29, 1937, on which date the Board adopted a resolution approving the report of the committee and the pension plan which it submitted, and authorized the submission of the plan at the next meeting of the stockholders. The resolution, in part, is as follows:
‘Now, therefore, be it resolved that in the opinion of this Board the adoption of the plan aforesaid which has been formulated by a Committee hereof and submitted to this Board in the form of three separate trust agreements designed to cover three separate classes of its employees and a draft of contract designed to cover the case of T. M. Girdler, this corporation's Chairman and President, is advisable.
‘Be it further resolved that said plan so formulated and embodied be submitted for approval to the stockholders of this Corporation at its annual meeting to be held on the 14th day of April, 1937, due notice of such plan to be set forth in the notice of such meeting. * * *.’ (Plaintiff's Ex. 18—Deft's Ex. 9)
On March 5, 1937, notice was given of the stockholders' meeting, which notice stated that the stockholders would vote upon
‘The approval of a pension plan which has been formulated, and the adoption of which has been declared advisable, by the Board of Directors of the Corporation, involving immediately approximately 75 officers and employees, pursuant to which plan (a) those employees of the corporation, to be selected from time to time by the Board of Directors, who are regarded as most essential in the conduct of its business will be entitled to receive pensions upon retirement, the standard retirement age upon the basis of which the amount of pension payment is arrived at being fixed at sixty-five (65) years; the sums for the payment of such pensions to be provided by the purchase of annuity and/or insurance contracts from insurance companies, the annual premiums thereon to be paid by joint contributions of such employees and of the corporation, in the ratio of 60% by the corporation and 40% by said employees, contributions by the corporation, however, not to exceed nine per cent (9%) of the annual salaries from time to time, of such employees; said plan contains certain other detailed provisions applicable to employees so selected, dealing, among other things, with incapacity arising during employment, discontinuance of employment, and the right of the corporation to discontinue operation of the plan with respect to them; and (b) the corporation will contract with certain principal executive officers so that such officers shall be entitled to receive pensions upon retirement on a non-contributory basis, the standard retirement age to be fixed at sixty-five (65) years; no such officer's pension, however, to exceed an amount based upon a pension rate of 3% of such officer's present salary for each year of such officer's past and future services with the Corporation beginning with the year 1930. * * *.’ (Deft's Ex. 4)
We have quoted the above notice because of its importance in this action, and for the same reason we quote the proxy which was signed by Mrs. Holmes and returned by her:
‘Know All Men by These Presents, that the undersigned stockholder of Republic Steel Corporation, a New Jersey corporation, hereby constitutes and appoints Tom M. Girdler, Victor Emanual and Myron A. Wick, and each of them, the true and lawful attorneys, agents, and proxies of the undersigned, with full power of substitution, for and in the name, place and stead of the undersigned, to attend the annual meeting of the stockholders of Republic Steel Corporation to be held at the principal office of the Corporation, Number 15 Exchange Place, Jersey City, New Jersey, on Wednesday, the 14th day of April, 1937, at 11 o'clock in the forenoon, Eastern Standard Time, and any and all adjournments thereof, and thereat to vote the number of votes or shares of stock the undersigned would be entitled to vote if then personally present, (1) in the election of Directors, (2) in favor of the approval of the pension plan described in the notice of said meeting, a copy of which notice has been received by the undersigned, and (3) in respect of any and all other matters that may properly come before said meeting or any adjournment or adjournments thereof, as fully and with the same effect as the undersigned might or could do if personally present—hereby ratifying and confirming all that said attorneys, agents and proxies and each of them or their or his substitutes may lawfully do by virtue hereof. A majority of said attorneys, agents and proxies who shall be present and act at said meeting or any adjournment or adjournments thereof (or, if only one shall be present and act, then that one) shall have and may exercise all of the powers of all of said attorneys, agents and proxies hereunder.’
‘Dated 3/8/1937
[s] ‘Mrs. Hannah S. Holmes (Seal)‘
(Defendant's Ex. 16)
The stockholders met on April 14, 1937, and the evidence is undisputed that at this meeting the pension plans and the various agreements to be executed in connection therewith were carefully read and explained to the stockholders by one of the directors who was a lawyer. The stockholders thereupon by the requisite vote approved the plan. At this meeting approximately 5500 shares were represented in person and 3,000,000 shares were present by proxy. Thereafter the Board of Directors, by appropriate action, authorized the execution of the necessary documents to carry into effect the plan authorized and approved by the shareholders. The agreement with the defendant was premised upon his value to the Republic, the desire to retain or to keep has services available to the corporation, and the successful completion of the strip mill then contemplated to be erected by Republic. On his part, the defendant agreed, as follows:
‘(1) that he will remain in the employment of Republic at least until Republic's new continuous sheet strip mill, now under construction at Cleveland, Ohio, shall be fully completed and operating, and (2) that, during the time he shall be receiving a pension from Republic pursuant to the provisions of either paragraph 1 or 2 of this agreement, he will, while mentally and physically able to do so, render advisory assistance to Republic when requested so to do by its chief executive officer or by of its Board of Directors. * * *.’ (Plaintiff's Ex. 3—Deft's Ex. 14)
Republic, on its part, agreed:
‘* * * that in the event Girdler shall be in its employment at the time he reaches the age of sixty-five (65) years, and in the event he retires permanently from business at such time, it will pay him, for the balance of his life, a pension of Thirty-six Thousand Dollars ($36,000) per year. The amount of said pension is based upon a pension rate of Three Thousand Dollars ($3,000) per year for each year of Girdler's past and projected future services with Republic up to the age of sixty-five (65) years. If, however, Girdler shall not be retired at the age of sixty-five (65) years, but shall continue in Republic's employment at its request, such pension shall not be paid him until he does retire, and the amount of such annual pension shall be increased by the amount of Two Thousand Eight Hundred Dollars ($2,800) for each year Girdler remains in the employ of Republic after the age of sixty-five (65) years up to a maximum pension of Fifty Thousand Dollars ($50,000) per year upon retirement.’ (Plffs. Ex. 3—Defts. Ex. 14)
This agreement was duly executed as of the 15th day of April, 1937, and is now in full force and effect. The defendant, as above stated, has not retired and therefore while the pension was approved no funds have been disbursed thereunder. It will be observed that the plan provides no contribution on the part of the defendant.
A non-contributory plan was also adopted and entered into with the president of Republic. These were the only non-contributory contracts. The plaintiff attacks the pension plan for these reasons:
1. That the defendant is not an employee within the meaning of the New Jersey statute permitting corporations to adopt pension plans for its employees; therefore he is not entitled to participate.
2. That the New Jersey Corporation Act specifically excludes him since he was ‘actively engaged in the conduct of the corporate business.’
3. That the proxy voted by the defendant was not binding upon the shareholders because of the defendant's interest in the subject matter, and further because the proxy did not describe that interest.
4. Under the General Corporation Laws the agreement was invalid.
The defendant, on the other hand, says that the pension plan was valid under the New Jersey statutes; that the defendant was an ‘employee’ within the meaning of the General Corporation Act; that in any event Republic had implied authority to enter into the contract with the defendant, and finally that the decedent specifically authorized the adoption of the plan and her representative is therefore estopped to question it.
The applicable part of the New Jersey Corporation Act is as follows:
‘Any stock corporation formed under any law of this state may, upon such terms and conditions as may be determined in the manner hereinafter designated, provide and carry out a plan or plans for any or all of the following purposes:
‘a. The issue or the purchase and sale of its capital stock to any or all of its employees and those actively engaged in the conduct of its business or to trustees on their behalf, * * *.
‘b. The participation by all or any of its employees and those actively engaged in the conduct of its business in the profits of the corporate enterprise or of any branch or division thereof. * * *
‘c. The furnishing to its employees wholly or in part at the expense of the corporation of medical services, insurance against accident, sickness or death, pensions during old age, disability or unemployment, education, housing, social services, recreation or other similar aids for their relief or general welfare.’ Title 14:9–1, N.J.S.A., General Corporation Law of New Jersey.
We therefore find ourselves called upon to construe the statute of a sister state. The courts of New Jersey have not found it necessary to construe the above statutes as applied to a case such as the one at bar, and our task therefore is rather a bold one. The plaintiff urges that the defendant cannot be considered an employee within the meaning of the statute. A New Jersey court of equity in Watson v. The Watson Mfg. Co., 30 N.J.Eq. 588, said the term ‘employee’ is one of rather broad signification meaning one who is employed, and may include anyone who renders service to another. Webster's New International Dictionary defines employee as ‘one employed by another; one who works for wages or salary in the service of an employer,’ but apparently believes that the word can be distinguished from the word ‘official’ or ‘officer.’ Bouvier, in his Law Dictionary, points out that, ‘strictly and etymologically it means a person employed but in practice and from the French language it ordinarily is used to signify some official employment and as it is generally used by us, though perhaps not confined to any official employment, it is understood to mean some permanent employment or post. It may be one who renders service to another.’
Thus we find that the term is used in many ways. There are many cases which agree with the plaintiff that the word should not be applied to the higher officials or officers, but should be used to describe clerks and workmen and laborers. One definition describes the employer as one who stands in such a relation to another that he may control the work of the other person and direct the manner in which it shall be done. Employment contemplates a relationship where one is employer and the other the employee and where one is a master and the other the servant; where one lays out the work and the other performs it.
Since we are dealing with the law of the state of New Jersey, the case above mentioned of Watson v. The Watson Mfg. Company, 30 N.J.Eq., 588, is of interest. There, a drayman, who prior to 1875 carried goods for anyone who could employ him, contracted with the defendants to do all of their carting in Jersey City. He thereafter worked for them regularly and almost continuously and exclusively. He was in their regular employ and entirely under their control in all matters within the scope of his employment. The Court said that he did not hold to them the relationship of contractor so that the measure of duty of each of the other was fixed by mutual promises, but he was their servant. The Court concluded that the word employee properly describes anyone who renders labor or service to another.
In Gurney v. Atlantic & Great Western Ry. Co., 58 N.Y. 358, ‘employee’ was held to embrace an attorney and counsel. The first branch of the syllabus of that case makes this statement:
‘The term ‘employee’ in the ordinary and usual sense includes all whose services are rendered another. It is not restricted to any kind of engagement or service, but includes the professional man as well as the common laborer.'
In those cases where the chief stockholder is the executive officer it is very easy to say, somewhat loosely, that he is the employer and those who work for him the employees, but that can not be said in the case of a great corporation where the owners are thousands of people known as shareholders, many of whom own a small number of shares and the management consists of those who own but a small interest in the company. The corporation is the employer, and while it is an artificial invisible being, it none the less has a legal entity and it is the master, and all those who work for it for salary or wages and devote their full time and energy to it, are employees.
The Republic was the employer, and even the Chairman of the Board, important and powerful as he was, was an employee. He worked for a salary, he devoted his entire time to the business, he was responsible to the Board of Directors, who could refuse to hire him; he was a servant of the corporation. To say that a man is powerful enough to dominate and control a great corporation when he owns approximately 11,000 shares out of 5,000,000 shares is to speak carelessly. It is true that such a man may have great influence upon the policies of a corporation, and it is also true that the very size of such a corporation often makes it difficult for the shareholders to assert themselves, but they nevertheless have the power, and if they care to assert their rights they may do so.
If the corporate structure should become too unwieldy for the protection of shareholders the remedy lies in legislative and not judicial relief.
But, it is further urged, why should the legislators or the directors and stockholders for that matter, be interested in pension plans for officials? It is urged that the average executive is generally well paid, has the opportunity of building up reserves, and enjoys a satisfactory tenure of office. The executive, it is said, has an opportunity to save and should have the knowledge to invest wisely.
While there may be some truth to this statement, one must remember that it cannot be applied to the total executive or official group. Not all executives are well paid nor do they have substantial reserves. The average executive, like the average worker or professional man tends to live up to his income. There are many demands made upon the executive in the performance of his duties which tax his financial resources. Also in recent years the executive has carried a very heavy tax burden, one which is greatly lessening his opportunity to amass great riches.
The trend in corporate development in recent years has tended to interfere with promotion and increases in salaries. In great corporations executives must gradually work their way to the top. This process is often very slow, so that while the executive may enjoy a comfortable salary, perform work of a responsible nature under pleasant surroundings, very often the opportunity for accumulating large individual savings is limited. Corporations have, therefore, found it to their advantage to provide some form of pension plan which would include executives as well as other employees. These plans have certain objectives, such as supplying ultimate compensation sufficient to attract capable leaders. They are usually liberal enough to provide sufficient security to retain corporation executives against the onslaughts of other corporations seeking to attract them to their service. Finally corporations have discovered that pension plans are very useful in bringing about the retirement of executives when they have passed the height of their corporate usefulness and they are declining in ability and usefulness and are seriously impeding the promotion of younger and more vigorous men.
When the Legislature of the State of New Jersey enacted the provisions of the Corporate Act with reference to pensions it doubtless had these things in mind. It was not considering Republic alone, but it was thinking of the countless number of corporations, large and small, which were incorporated under the laws of the state. Had it been considering this particular defendant and this particular company it might have exempted the defendant, but it had in mind instead the thousands of small executives, the great number of officers in the more modest companies and the law was intended for their benefit as well as the benefit of the executives of the gigantic corporations. Having failed to differentiate between great executives and small executives, and between major officials and minor officials, it must have intendedthat all were employees. Perhaps none of the 75 others who have been characterized in evidence as key men might come within plaintiff's definition of employee. It certainly is true that if the Legislature of New Jersey meant only the men engaged in manual or clerical work, none of them would be protected. Just where would the Legislature draw the line between executive and laborer. It is not difficult when considering the very top or the very bottom of the employment ladder but in the great intervening distance the task would be indeed difficult. Recognizing the difficulty of distinguishing between top executives and minor executives and between the various types of corporate officials, the legislature wisely gave to the term ‘employee’ its broad definition.
But the plaintiff says the very language of the statute differentiates between employee and ‘those actively engaged in the conduct of its business,’ or the executives. It is urged in support of this argument that the statutes give employees and ‘those actively engaged in its business' the opportunity to purchase stock of the corporation under certain conditions; that it gives employees and ‘those actively engaged in its business' the right to participate in profits but that when the Legislature came to authorize corporations to adopt pension plans it limited the benefits to ‘employees.’
An examination of the New Jersey statutes shows the fallacy of this contention. Under the New Jersey Corporate Act, Title 14:7–1, ‘the business of every corporation shall be managed by its board of directors, * * *.’ Directors are therefore by the law charged with the conduct and management of the corporation's business. It was, therefore, the directors, and perhaps others who held office but did not devote full time in the operation of the business, that the legislature meant when it referred to those engaged in the active conduct of the business. There were the ones who could participate in profits and could buy stock, but since they did not devote all their time or did not otherwise fall within the broad definition of employees, they could not participate in a pension plan.
There is a clear distinction between a director who is charged by law with the conduct of the corporate business and the executive who is responsible to the directors and shareholders for the execution of their policies.
We, therefore, believe that when the Legislature of the State of New Jersey used the term ‘employee’ in the General Corporation Act as applied to corporate pensions, they included executives as well as those in the more humble stations of employment, and that this would include the Chairman of the Board as well as the lowest laborer in the steel mill.
The plaintiff's argument, that the vote by which the pension plan was approved by the stockholders was invalid because the defendant's interest therein was not disclosed, and because he was one of the proxies authorized to vote for the plan, next invites our attention.
As stated above the notice of the meeting set forth in considerable detail the pension plan to be considered at the stockholders' meeting. The fact that the defendant's name was not mentioned as one of the ‘principal executive officers' who would receive a non-contributing contract does not lessen the validity of the notice. The purpose of the notice was to inform the shareholders of the matters which would be presented for consideration at the meeting, and this was done. It informed the stockholders of the nature of the plan to be considered and they could, upon receipt of the notice, either attend the meeting and find out more about the plan, or do nothing, or accept it, and authorize the proxy committee to vote in favor of it. Mrs. Holmes took the latter course. A shareholder cannot be heard to complain with a notice as complete and detailed as this one.
The plaintiff, however, strenuously urges that the defendant had an interest in the matter which disqualified him from voting and cites many cases where the directors were disqualified from voting when they had an interest in the subject matter before the Board of Directors. The general principle of law is clear that a director can not be guilty of self dealing, nor can he vote on a matter within his discretion when he has an interest therein, but the plaintiff forgets that the defendant as one of the proxy committee had no discretion. He was instructed by the decedent to vote the proxy which she signed in favor of the plan. The decision in favor of the plan was the decision of the shareholder and not that of the proxy committee. It was simply the hand which figuratively placed her marked ballot in the ballot box. The cases therefore dealing with the exercise of discretion on the part of interested directors are obviously not in point.
The pension contract between the defendant and Republic may have had many points the wisdom of which could have been questioned. We are not called upon to do so. We are asked only to determine its legality. Apparently those who heard the explanation in the stockholders' meeting were satisfied with it for all voted for it after listening to a detailed explanation of its terms. In any event, Mrs. Holmes estopped herself to complain by her own act when she signed the proxy.
We, therefore, are of the opinion that not only was the action of the shareholders in full accordance with law and the vote of the proxy committee valid, but also that the decedent estopped herself by her conduct to question it.
Finally, the plaintiff contends that the pension agreement was not valid under the general corporation laws of the State of New Jersey. It is said that the defendant was an elected officer, that when the directors executed the pension plan, or contract, with the defendant they, in effect, granted him pay which he would receive when out of office, and that the contract continued beyond the term of the present directors, and thereby hampered the further action of the Board.
In the consideration of this point, we again encounter the troublesome question of past services. While such services are recognized in almost all pension contracts there is in the case before us a present consideration which makes the contract enforcible. The elements above mentioned, of retaining defendant in the employ of the company, of securing the benefit of his services while the strip mill was under construction, and of retaining him in an advisory capacity, give the contract a good and valuable consideration.
The contract was based upon future services. These may have been some of the reasons why the defendant has continued in the service of the company five years after he had reached the age of retirement.
The policy of the law is well established in approving pension contracts of this nature when supported by sufficient consideration. Such a contract can, in our opinion, be said to benefit not only the employees but also the corporation. It provides a vehicle for the orderly progress of the corporation. The courts have, therefore, upheld contracts of this nature when the same have been regularly voted by the directors and stockholders with a view to the best interests of the corporation.
It is urged by the defendant that even if not expressly authorized by the general corporation statute of New Jersey, it is within the implied powers of the corporation to enter into the pension contract. In view of the fact that we have found that the New Jersey law specifically authorized the execution of a pension contract, it is perhaps unnecessary for us to consider this point. However, we have reached the conclusion that even if it could be said that the New Jersey statute above quoted is not applicable, that it is within the implied powers of the corporation to enter into this pension plan and contract.
The case of Heinz v. National Bank of Commerce, 8 Cir., 237 F. 942, 952, states so clearly not only the legal principles approving such contracts, but also so admirably gives the rationale back of the court's action, that we herewith quote from the opinion at length:
‘Even if it were possible, it would serve no useful purpose to enumerate specifically the implied powers of a private corporation, whether engaged in the business of carrying on a railroad, a bank, or other business. In relation to the subject of employés only numerous questions arise: What shall be the number of employés? What the amount of their salaries? Shall they be paid weekly or monthly? What shall be their hours of service? Shall they be paid for overtime work? Shall they be allowed vacation periods, and, if so, to what extent? Shall they receive pay during such periods of vacation? Shall they be paid during absence caused by sickness, and, if so, during what period of time? Where the employés are numerous at a given place shall a lunch counter be provided and operated at cost, for the benefit of the employés? Shall hospital benefits be provided for sick or disabled employés?
‘There can be no doubt that these are matters relating to the internal management of the corporation, and as such within its implied powers for determination. Can any valid distinction be drawn between the above matters and the establishment of a pension fund, in proper cases and under proper circumstances? May not this, under proper circumstances, as well as the former matters, have a direct and reasonably necessary bearing upon the successful carrying out of the business of the corporation, upon the class of employés likely to be obtained, upon the character of the service likely to be rendered, and upon the length of such service and the loyalty of the employés?
‘The tests in regard to all such matters are: Is the act or transaction prohibited by the charter or other law? Is the act or transaction reasonably suitable and necessary for the carrying on of the business for which the corporation was created and organized? Is the act or transaction performed in good faith, or as a mere cloak to some illegal or fraudulent act?’
In further support of our belief, that this contract is within the implied power of the corporation to execute, we desire to quote from the case of Gilbert v. Norfolk & W. Ry. Co., W.Va., 171 S.E. 814, 815, as follows:
‘* * * The creation of pension funds for corporations has been uniformly sustained in the few cases in which the question of their validity has arisen. Heinz v. National Bank of Commerce, [8 Cir.], 237 F. 942, 150 C.C.A. 592. The courts have gone further than to sustain the mere creation of a pension fund on the part of private business corporations, and have held that when created, the existence of such fund and of the regulations for its administration adopted by the corporation constitutes an offer on the part of the corporation to those engaging in its service which, when accepted by the entrance of persons into the service of the corporation or by remaining in the service of the corporation (such fund and regulations being in existence at the time), gives rise to a contractual relationship which may ripen into vested rights in the employees. Heinz v. National Bank of Commerce, [8 Cir.], 237 F. 942, 150 C.C.A. 592. The same is true with reference to the offering of bonuses by corporations to their employees. Kerbaugh, Inc. v. Gray, 2 Cir., 212 F. 716;Haag v. Rogers, 9 Ga.App. 650, 72 S.E. 46;Scott v. [J. F.] Duthie & Co., 125 Wash. 470, 216 P. 853, 28 A.L.R. 328, and note.’
‘The principles upon which the holdings before referred to are based would seem quite clearly to distinguish the right of the employee to participate in a pension fund, from the right of the employee to participate in future wages. In the case of the pension fund, the employee has a contractual relationship with the employer from the beginning of the employment. An offer is held out to him from the beginning and continuing throughout the employment of a certain part of the pension fund that he will be entitled to when he has reached a certain status based upon the duration and satisfactoriness of his service. When he brings himself within the terms of the offer by acquiring the defined status, the right to participate in the pension fund under the terms of the offer vests in the employee. He has earned it by complying with the terms of the offer and fulfilling his part of the contract of employment to that end. His right to it is irrevocable to the extent of his pro rata share of the fund set apart for the fulfillment of the purpose as to him and others entitled thereto. On the other hand, the matter of future wages contains no element of such a settled contractual relationship. Distinguishing instances of wages or salary earned during specific terms of employment established by contract (see 2 R.C.L. § 12, p. 603), wages earned from month to month have no existence until the service has been rendered. There is no settled contractual relationship in the present out of which they are to grow in the future. Such is not the case with the pension fund.’
And finally, this principle was upheld in our own state in the case of Mabley & Carew Co. v. Borden, 129 Ohio St. 375, 195 N.E. 697, wherein a unilateral contract in favor of an employee was held to be a vested contract which the beneficiary could enforce.
The cases above cited reflect the modern tendency approving pension plans for employees. It would be unfair to provide social security and pensions for the worker, laborers and minor officials and to deprive those who occupy supervisory positions of the same privilege. The modern judicial, as well as legislative trend, supports this view. It is now recognized that corporate success depends upon loyal, efficient and satisfied employees. The same mental processes and the same human emotions govern the man in the office and the man in the mill. A corporation would be shortsighted which sought to make its laborers and clerks satisfied and happy employees, and neglected its key men and executives. There should be equality under the law, and all who work, whether it be with their minds or with their hands, should enjoy the opportunity to share in the benefits of their labor. The reward for faithful, loyal and long continued service should not be limited to any class.
For these reasons we believe the salary of the defendant should not be disturbed, that there should be a finding for Republic against defendant Girdler in the sum of $51,000, with interest, for the sum paid in the year 1940 as additional compensation, and there should be a further finding that the pension plan as entered into is a valid, binding and enforcible contract.
A journal entry in accordance herewith may be prepared. Exceptions to all parties reserved.